The most powerful tool that commodity trading offers is leverage, which promises greater returns and allows the traders to control a higher position but using fewer capital inputs. It’s a strategy that can magnify gains when markets move in your favor, but it also comes with significant risk. If you’re considering using leverage in your trading, it’s crucial to understand both the potential rewards and the dangers involved.
In leverage, you are in a sense borrowing the money from your broker to increase your position size. For example, in 10:1, it means you can manage $10,000 worth of commodities with only $1,000 of your own. This thus gives you an opportunity of enjoying movements of the price of commodities without full upfront capital. Hence, in theory, leverage enables an individual to reap more than that original return.
This makes leverage alluring in commodities trading because the price of commodities is highly volatile. The price of some commodities like oil, gold, or any agricultural product fluctuates dramatically within shorter periods. By leverage, the trader hopes to catch those price movements. For example, if you believe the price of crude oil is going to increase, you can use leverage to multiply your potential returns if the price does go up. The same goes for any other commodity, be it an uptick in gold prices because of an economy that’s in a downturn, or an increase in agricultural goods following a bad harvest.
This can, on the one hand, amplify profits, but on the other hand it just as easily amplifies the danger of losing. If the market moves against you, your losses are as amplified as your gains. If you’re trading with leverage and the price of the commodity has moved the opposite way to the position you’re in, you could lose more than your original investment. In extreme cases, you may receive a margin call from your broker when he seeks to raise extra funds to continue supporting your position. When you are unable to raise the margin, your position will probably be sold, and you lose much more than what you put in.
In leverage, you are in a sense borrowing the money from your broker to increase your position size. For example, in 10:1, it means you can manage $10,000 worth of commodities with only $1,000 of your own. This thus gives you an opportunity of enjoying movements of the price of commodities without full upfront capital. Hence, in theory, leverage enables an individual to reap more than that original return.
This makes leverage alluring in the commodities trade because the price of commodities is highly volatile. The price of some commodities like oil, gold, or any agricultural product fluctuates dramatically within shorter periods. By leverage, the trader hopes to catch those price movements. For example, if you believe the price of crude oil is going to increase, you can use leverage to multiply your potential returns if the price does go up. The same goes for any other commodity, be it an uptick in gold prices because of an economy that’s in a downturn, or an increase in agricultural goods following a bad harvest.
This can, on the one hand, amplify profits, but on the other hand it just as easily amplifies the danger of losing. If the market moves against you, your losses are as amplified as your gains. If you’re trading with leverage and the price of the commodity has moved the opposite way to the position you’re in, you could lose more than your original investment. In extreme cases, you may receive a margin call from your broker when he seeks to raise extra funds to continue supporting your position. When you are unable to raise the margin, your position will probably be sold, and you lose much more than what you put in.
Jack